What Does the Supreme Court Ruling on Internet Sales Mean for Industrial?

The explosion of the e-commerce industry has dominated headlines for the past two decades, and it’s only accelerating. Yet, despite the colossal spike in online sales revenue, Congress hasn’t taken any action in the past 26 years on internet sales taxes — until now.

The recent five-four vote in the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. is the most significant ruling on internet sales taxes since its 1992 decision in Quill Corporate v. North Dakota. While the latter decision ruled that states could only collect sales taxes from e-tailers with a warehouse or office in the state, South Dakota v. Wayfair enables South Dakota to require all retailers, regardless of their physical presence, to collect sales taxes from residents’ online transactions. However, the ruling limited the state taxation to e-tailers with $100,000 or more in revenue or 200 transactions annually.

While the South Dakota v. Wayfair ruling pertains specifically to a South Dakota law, 16 states have similar laws on the books and the remaining 28 states that collected sales taxes are sure to follow suit. Many states have already moved into action. And while Wall Street took a dim view on the ruling in the short term, as share prices of major e-commerce companies initially took a nosedive in its wake, many retailers significantly bounced back shortly thereafter.

It remains to be seen how the ruling will affect logistics space needs for small online retailers. While it may not significantly influence consumer spending, the effect on logistics site selection decisions for both omnichannel as well as pure-play e-tailers will be more immediate. As retailers and logistics executives prepare for the consequences of South Dakota v. Wayfair, it’s important to examine how this will impact traditional versus online sales, and where we go from here.

Implications for Traditional Retail vs. Online Sales

Many brick-and-mortar retail businesses are applauding the decision because it helps even the playing field with online retailers. The reality is a bit more complicated. Large e-tailers, perceived as the greatest enemies of brick-and-mortar stores, already have the infrastructure to handle tax collection protocols given that their sizable distribution networks cover numerous sales tax-collecting jurisdictions. The ruling even helps simplify those processes. Collecting more taxes to send to more states means scaling upwards, not starting from scratch.

In contrast, online businesses will have to overcome the administrative hurdle of accounting for 10,000 different state and local sales tax jurisdictions, if they haven’t enabled those processes already. Those that use online marketplaces can’t count on those marketplaces to collect the taxes for them, either. Washington and Pennsylvania are among the states that require online marketplaces to collect taxes. However, states such as Rhode Island only require marketplaces to provide a list of the businesses for which they don’t collect taxes — leaving the burden of the sales tax collection on the individual sellers. This disparity of implications between massive e-tailers and smaller online businesses will likely be an ever-evolving nuance of e-commerce over the short term.

For small e-commerce companies, the solution will probably be to invest in accounting software that automatically tracks and accounts for sales taxes. Another possibility is that some online-only retailers will expand their brick-and-mortar presence, as prior restrictions or uncertainty around physical presence requirements have been nullified.

Where Do We Go From Here?

In the wake of South Dakota v. Wayfair, uncertainty still rules the day. We may likely see new state or national laws that build on the ruling and further lighten the burden for smaller online businesses — although a Congress split along partisan lines may be unable to reach a consensus on broader issues. Or, we may see lower court rulings that clarify the rules.

What we can expect: Bigger retailers will find themselves unimpeded by sales tax when planning logistical expansions, while smaller players, if they haven’t already, may be forced to invest in tax-compliance infrastructure at the cost of profit margins and business growth.

Aaron Ahlburn is a Managing Director and Director of Research for the industrial and retail property markets for JLL’s Americas region. His directives include the development, differentiation and implementation of research strategy, methodology, platform deliverables and broad sector analyses for the warehouse, distribution, manufacturing and retail property markets in the U.S., Mexico, Canada and Latin America.

About NAIOP

Since 1967, NAIOP, the Commercial Real Estate Development Association, has become the leading organization for developers, owners and investors of office, industrial, retail and mixed-use real estate. NAIOP comprises 18,000+ members and provides strong advocacy, education and business opportunities through a powerful North American network. Visit our website at www.naiop.org.